How Hyman Minsky Can Guide The U.S. To Recovery

Last week I raised some objections to President Obama's latest
proposal to jumpstart the economy through business tax credits.
While I am not opposed to these, I believe they are not up to the
task at hand. We need a much more ambitious and sustained
program. In this column I will provide a general outline of
reform based on the work of Hyman Minsky.

First it is necessary to emphasize that Minsky was always
skeptical of a “pump-priming” approach to government policy. He
argued that simply telling government to spend “more” in order to
raise aggregate demand on the hope that this could create jobs
and growth would be a mistake. It would almost certainly cause
bottlenecks and inflation long before full employment was
reached. Rather, policy-making is going to have to be specific,
with well-formulated regulations to constrain private firms and
with well-targeted government spending. The wholesale abandonment
of regulation and supervision of the financial sector has proven
to be a tremendous mistake. Left to supervise itself, Wall Street
created complex and exceedingly risky financial instruments that
allowed it to burden households and nonfinancial firms (as well
as state and local governments) with debt. Wall Street also
managed to shift the distribution of income toward its traders
and CEOs—just before the financial crash, the financial sector
captured 40% of all corporate profits in the US. The debt to GDP
ratio rose to 500% (versus 300% in 1929 on the eve of the Great
Depression). Income inequality rose to levels not seen since
1929—with poverty rising in the midst of plenty. Even though Wall
Street was booming, real economic growth was not particularly
good in the period before the crash; and the average real wage of
workers was no higher than it had been back in the early 1970s.
And while official unemployment was relatively low, unmeasured
unemployment and underemployment has been rising on trend. It is
clear that fundamental reform of the financial sector—on a scale
similar to what was done in the 1930s—will be required to get the
American economy back on track. A similar story can be told about
all the advanced capitalist economies.

In addition, we need to do something about the rest of the
economy to create jobs and rising living standards. If Minsky did
not believe that “fine-tuning” is possible, what can be done?
First policy should address the obvious areas that have been
neglected for more than three decades as well as new problems
that have emerged. America's public infrastructure is entirely
inadequate—with problems ranging from collapsing bridges and
levees, overcrowded urban highways and airports, an outdated
electrical grid, and lack of a highspeed rail network. Clearly,
President Obama's $50 billion is far too small—off by a factor of
40 if we are to believe the engineers who tally our nation's
needs at $2 trillion.

Global warming raises new problems that need to be addressed:
moving to cleaner energy production, expanding public
transportation, retrofitting buildings to make them energy
efficient, and reforestation. In all of these areas, government
must increase its spending—either taking on
the projects directly or subsidizing private spending. Because
this spending will help to make America more productive, the
spending will be more effective than general pump-priming and
will not suffer from the drawbacks mentioned above.

Still, it is likely that even if all of these projects are
undertaken, millions of workers will be left behind. First there
is no reason to believe that the additional demand for labor will
be sufficient to create enough jobs; second, there can be a
skills-mismatch, problems of discrimination (against ethnic
groups, by gender, against people with disabilities, and against
people with low educational attainment or criminal records), and
geographic mismatch (jobs need to be created where the unemployed
live). For this reason, many of his followers have revived
Minsky's call for an “employer of last resort”. Minsky argued
that only the federal government can offer an infinitely elastic
demand for workers—hiring anyone ready and willing to work—at a
decent wage. This is also called a job guarantee program. The
idea is that the federal government provides funding for a basic
wage with benefits. Creation and administration of the program as
well as supervision of the workers in the program could be highly
decentralized, to local not-for-profit agencies, community
development organizations, and state and local governments. The
program would take “workers as they are”—designing jobs to fit
the worker's needs and abilities. There would be no skills or
education requirement, although all jobs would provide training
and perhaps even basic education. Jobs would be created where the
workers live. Flexible work arrangements could be made (such as
part-time jobs) to fit the needs of working mothers (and even
students of working age). The jobs could include some of those
listed above (retrofitting homes with insulation, for example)
but would be expanded to include provision of public
services—child and aged care, “meals on wheels” (delivering hot
meals to aged, infirm, and those otherwise confined to their
homes due to disabilities), playground and subway supervision,
litter clean-up, and so on.

All of this could require more government spending (although it
is possible that reducing spending in areas that do not generate
jobs and that do not enhance US production and living standards
would partially offset the additional spending). While Washington
currently fears budget deficits (with many arguing that they only
“crowd-out” private spending), this is because policymakers
conflate government budgets with household budgets. A sovereign
government's budget is not like the budget of a household or
firm. Government issues the currency, while households and firms
are users of that currency.

Modern governments actually spend by crediting bank accounts. It
really just amounts to a keystroke, pushing a key on a computer
that generates an entry on someone's balance sheet. Government
can never run out of these keystrokes. Remarkably, even the
Chairman of the Fed, Ben Bernanke, testified to Congress that the
Fed spends through simple keystrokes—hence could afford to buy as
many assets as necessary to bail-out Wall Street's banks. All
that is necessary is to recognize that the Treasury spends the
same way, and then Washington's policy-makers could stop worrying
about “affordability” of the types of programs that everyone
recognizes to be necessary: public infrastructure investment,
“green” investments to reduce global warming, and job creation.
To be sure, this is not a call for “the sky is the limit”
spending by government. Too much spending will be inflationary
and could cause currency depreciation. Government spending must
be well-targeted and must not be too large. How big is too large?
Once productive capacity is fully used and the labor force is
fully employed, additional spending would be inflationary.

This is also called the “functional finance” approach to policy,
developed by Abba Lerner (a close friend to Minsky). Policy
should be directed to resolving problems, raising living
standards, and achieving the public purpose as defined by the
democratic process. There should be no pre-conceived budgetary
outcome—such as a balanced government budget over a year or over
the cycle. In other words, the goal should be to use the
government's “purse” to achieve the public purpose—not to mandate
any specific dollar amount for spending or for its deficit. This
does not mean that government spending on programs should not be
constrained by a budget—Congress needs to approve the budgets for
individual programs, and then hold program administrators
accountable for meeting the budgets. The purpose of budgeting is
not to ensure that the overall federal government budget
balances, but rather to reduce waste, graft, and corruption.
Budgeting is one means of controlling projects to help ensure
they serve the public interest. Unlike the case of a household or
firm, the sovereign government can always “afford” to spend more
on a program—but that does not mean it should spend more than
necessary.

I know that some of this will appear shocking to readers. In
coming columns I will try to put fears of deficit spending to
rest. Most of the hysteria currently whipped up in Washington is
“much ado about nothing”.

L. Randall Wray is a Professor of Economics, University of
Missouri—Kansas City. A student of Hyman Minsky, his research
focuses on monetary and fiscal policy as well as unemployment and
job creation. He writes a weekly column for Benzinga every Thursday.

He also blogs at
New Economic Perspectives, and is a BrainTruster at
New Deal 2.0. He is a senior scholar at the Levy Economics
Institute, and has been a visiting professor at the University of
Rome (La Sapienza), UNAM (Mexico City), University of Paris
(South), and the University of Bologna (Italy).